Housing is the biggest threat to Australia’s economy and a price crash could balloon banks loan losses and derail household consumption, the Organisation for Economic Co-operation and Development (OECD) said in its first major review of the country since 2014.
The OECD estimates the risk of a recession at around one in five, and also lists China slowdown, plunge in iron ore and coal prices and lack of business investment among other risks.
It isn’t all gloom and doom though. Australia is well positioned to handle such shocks with a relatively higher stock of monetary and fiscal policy ammunition left compared to other economies, it said. OECD’s has repeatedly warned Australia risks a dramatic drop in house prices and regulators have voiced concerns over unprecedented household debt and speculation driving home prices.
“Macrofinancial indicators underline the threat from the housing market, with house prices and related indicators pointing to continued vulnerability,” the OECD said. “The market may not ease gently but develop into a rout on prices and demand with significant macroeconomic implications.”
These charts from OECD indicate the run up in home prices.
Sydney home prices notched a 18.4% annual price growth last month, the highest rate since 2002 boom and have risen 75% in less than five years, according to research firm CreLogic. That has prompted calls for regulatory action to curb speculation. The debate over housing affordability has also intensified in recent months.
This chart shows the unaffordability.
The Reserve Bank of Australia governor Philip Lowe signalled that soaring house prices may be holding the central bank back from cutting rates further to stimulate the economy. The RBA reduced rates twice last year in August and October.
While in real terms, house prices have increased by 250% since the mid-1990s, there are indications past regulatory response such as a limit on investor lending, increased interest rate buffers and changed criteria to determine mortgage eligibility have tempered the market to an extent, OECD said. It added, measures to boost new homes, including planning-regulation reform, can also help ease market pressure over the longer term.
A dramatic drop in house prices may lead to cut household consumption and increase mortgage defaults that would potentially spread across the economy, OECD said.
Those views are in line with RBA ‘s Lowe, who last month said high levels of indebtedness could hurt confidence and push households to hold back on spending.